ACCTG 410 Chapter 12

_____ sales (sales picked up by the customer) are generally sourced in the destination state rather than the state where they are picked up.

-Dock

_____ sales are sourced in the state from which they were shipped.

-Government

§Require only those businesses with nexus in a state to file an income tax return

-Separate tax return

§Companies not filing a federal consolidated tax return can become a unitary group. §Unitary tax return group includes all members meeting the unitary criteria—whether they have nexus or not. §States west of the Mississippi River (and Illinois) are unitary return states.

-Unitary tax return

•Supreme Court identified _____ factors that can be used to determine whether a group of businesses is unitary: -Functional integration (vertical or horizontal integration or knowledge transfer) -Centralization of management (interlocking directors, common officers, or rotation of management) -Economies of scale (group discounts or other efficiencies due to size)

3

•The Supreme Court spelled out _____ criteria for determining whether states can tax nondomiciliary companies and to what extent. -Sufficient connection or nexus exists between the state and the business. -State may tax only a fair portion of a business's income. -Tax cannot be constructed to discriminate against nonresident businesses. -Taxes paid must be fairly related to the services the state provides.

4

•______ _______ -Includes all revenues earned in the ordinary course of business—sales less cost of goods sold and other expenses -Fairly apportioned or divided across the states where nexus exists §Business may apportion if it has nexus with a state, even if the state does not actually impose tax.

Business Income

•State Taxable______ -Businesses must calculate state taxable income for each state in which they must file tax returns. -Federal taxable income is generally the starting point for computing state taxable income. -Businesses must reconcile from federal taxable income to state taxable income. -Requires them to identify federal/state adjustments (differences) for each specific state before apportioning the income to a particular state where they have income tax nexus.

Income

•Income Tax Nexus -____ presence creates income tax nexus for all businesses—but sellers of tangible personal property may be protected by Public Law 86-272.

Physical

•Physical presence creates income tax nexus for sellers of tangible personal property, but if their in-state activities are limited to "protected" activities as described by _____ 86-272 they are protected from an income-based tax.

Public Law

§_______ oPublic Law 86-272 protects the solicitation of tangible personal property. oSupreme Court determined the following activities meet the definition of solicitation: ØSoliciting by any form of advertising ØCarrying samples and promotional materials for display or distribution without charge ØPassing inquiries or complaints to the home office ØChecking customer's inventory for reorder ØMaintaining a sample room for two weeks or less; this is known as the trade show rule ØRecruiting, training, and evaluating salespeople using homes or hotels ØOwning or furnishing personal property and autos used in sales activities

Solicitation

•Subject to taxes if: -Taxpayer's commercial domicile §_____ where a business is headquartered and directs operations

State

•Dividing State Tax Base among ____ -All state taxable income is taxed in the state of commercial domicile unless the business is taxable in more than one state. -An interstate business must separate its business income from nonbusiness income. -A business must apportion its business income among the states in which it conducts business, whereas it allocates nonbusiness income.

States

•Sales Tax Nexus -The _____ decision adds economic nexus for online sellers when they reach certain sales thresholds.

Wayfair

-States determine the _____ formula for income, and most rely on three factors: §Sales §Payroll §Property

apportionment

•Sales Tax Nexus -A _____ is required to collect sales tax from customers in a state only if it has sales tax nexus with that state.

business

•Businesses must pay income tax in their state of ____ domicile.

commercial

oPublic Law 86-272 _____ protect: ØService providers, sellers of retail property, or businesses licensing intangibles

does not

•The general rules for determining the amount of sales to include in the sales ______ calculation are: Tangible personal property sales are sourced (included) to the destination state (the location the property is delivered to and used in).

factor

•Businesses that establish sales tax nexus with a state but fail to properly collect sales tax can create significant ______ that need to be disclosed for financial reporting purposes.

liabilities

§Providing services along with the sale of tangible personal property violates the criteria and creates an income tax ________

liability

•Because states do not tax federal interest income, all states require a _____ adjustment for federal interest income.

negative

-If the business does not have ____ in the destination state, sales are generally "thrown back" to the state from which the property is shipped; this is called the throwback rule.

nexus

•Sales Tax Nexus -Businesses create sales tax nexus when they have a _____ presence in the state.

physical

•Most states require a _____ adjustment for state income taxes, as they do not allow businesses to deduct state income taxes, and they require a positive adjustment for state and local bond interest income if the bond is from another state.

positive

-General rules for determining the ____ factors are: §Use the average property values for the year [(beginning + ending)/2]. §Value property at historical cost rather than adjusted basis. §Include property in transit in the state of destination and also business property (values of rented investment properties are excluded). §Include rented or leased property by multiplying the annual rent by eight and adding this value to the average owned-property factor.

property

-Public Law 86-272 §Businesses are _____ from an income tax liability if (and only if) all the following apply: oTax is based on net income (not gross receipts or revenue). oTaxpayer sells only tangible personal property. oTaxpayer's in-state activities are limited to solicitation of sales. oTaxpayer participates in interstate commerce. oTaxpayer is nondomiciliary. oTaxpayer approves orders outside the state. oTaxpayer delivers goods from outside the state.

protected

•State and Local Taxes Purpose -Raise ____ to finance state governments

revenue

•Sales of tangible personal property are generally subject to the _____ tax.

sales

•Sellers with sales tax nexus collect and remit _____ tax.

sales

•Income Tax Nexus -Rules for determining income tax nexus are not necessarily the ____ as those for determining sales and use tax nexus.

same

-Sales of _____ are sourced to the state where the services are performed (California and Illinois are exceptions to this rule).

services

§Supreme Court held the following activities do not meet the definition of ____ and, therefore, create an income tax liability within the state in which these activities take place: oMaking repairs oCollecting delinquent accounts oInstalling or supervising the installation of property oTraining for employees other than sales representatives oApproving or accepting orders oRepossessing property oSecuring deposits oMaintaining an office other than in-home office

solicitation

Taxable items vary from ____ to ____

state to state

•Income Tax Nexus -Businesses must file income tax returns in _____ where they have income tax nexus.

states

•When a seller doesn't have sales tax nexus, the customer is responsible for paying a use tax to the state in which the property is _____

used.

•Subject to taxes if: ______ is the sufficient (or minimum) connection between a business and a state that subjects the business to the state's tax system.

§Nexus

______ nexus is a another assertion by states. -Businesses generally must have a physical presence in a state to establish income tax nexus with that state (P.L. 86-272 is the exception). -However, many states are currently asserting a business without a physical presence in the state may establish income tax nexus if it has an economic presence in the state. -MTC Factor Presence Nexus Standard

•Economic

_____ for Nonincome-Based Taxes -Establishing nexus for for nonincome-based taxes simply requires physical presence.

•Nexus

_______ Income -Common types of nonbusiness income and the rules for allocating them to specific states are: §Allocate interest and dividends to the state of commercial domicile (except interest on working capital, which is business income). §Allocate rental income to the state where the property generating the rental income is located. §Allocate royalties to the state where the property is used (if the business has nexus in that state; if not, allocate royalties to the state of commercial domicile). §Allocate capital gains from investment property to the state of commercial domicile. §Allocate capital gains from selling rental property to the state where the rental property was located.

•Nonbusiness

________-Based Taxes -Several states have nonincome-based taxes. §Texas Margin Tax §Washington Business & Occupation Tax -These taxes are deductible for calculating taxable income for net income-based taxes. -Public Law 86-272 doesn't apply to nexus for nonincome based taxes such as gross receipts taxes or net worth taxes.

•Nonincome

_____ -Defined as total compensation paid to employees -Includes salaries, commissions, bonuses, and other forms of compensation -Does not include amounts paid to independent contractors -Payroll for each employee is apportioned to a single state.

•Payroll

_______ -Includes both real and tangible personal property, but not intangible property

•Property

_____ factor includes: -All gross business receipts net of returns -Allowances -Discounts

•Sales

_____ concept pervades activities in the entire income tax system, including computing taxable income, computing apportionment percentages, and determining tax return filing requirements.

•Unitary